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An investor is planning to invest in shares in either, or both, of two companies - BBL Limited and YYZ Limited. Expected returns for the two companies will vary depending upon economic circumstances shown in the following table.
BBL Limited
YYZ Limited
Economic Circumstances (Probability)
Expected returns
Boom: (25%)
32%
13%
Normal: (50%)
18%
20%
Recession: (25%)
8%
28%
If combined as part of a Portfolio, the investor would purchase shares in both companies in the proportion of 50% in BBL Limited and 50% in YYZ Limited.
Required:
a) Calculate the average returns for BBL Limited and YYZ Limited.
b) Calculate the risk of BBL Limited's shares and YYZ Limited's shares.
c) Calculate the return and the risk of the Portfolio.
d) Using the results of your calculations above (for BBL & YYZ), specify how a Portfolio of shares is able to reduce risk. Which risk is reduced here & which cannot be in this method? Outline in your answer what process this is, and using specifics or examples from your calculation results above, highlight how the portfolio outcomes have changed in both returns expected & risk parameters
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